Astute long-term dividend investors should be looking for attractive utility stocks while the utility sector is still on the outs on Wall Street. Notably, the S&P 500 index has risen over 27% over the past year, while Vanguard Utilities ETF (NYSEMKT: VPU) has fallen 3%.
This is an opportunity to pick up solid dividend-paying utilities like NextEra Energy (NYSE: NEE), relatively small Black Hills (NYSE: BKH), and absolutely tiny Dividend King Northwest Natural (NYSE: NWN). The best part: They all have historically high yields today.
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NextEra Energy is all about the dividend growth
NextEra Energy’s 3.2% dividend yield probably won’t excite very many dividend investors. But what will excite dividend growth investors, as well as investors looking for a mix of growth and income, is the 10% annualized dividend growth rate over the past decade.
Meanwhile, management expects to keep up that impressive pace of dividend growth until at least 2026. Dividend growth of 10% a year is extremely high for a utility, with NextEra Energy’s unique model that mixes a regulated utility with a globally dominant clean energy producer underpinning the long-term success here.
That said, what dividend investors really need to know is that the 3.2% dividend yield is near the highest levels in a decade. So historically speaking, NextEra Energy looks attractively priced today, assuming your investment goal is dividend growth, not maximizing current income.
Black Hills is small but mighty
Black Hills has a market cap of $3.6 billion, which is small compared to $130 billion market cap NextEra Energy. But NextEra Energy’s 29 years of dividend increases pales in comparison to Black Hills’ streak of 53 years, which lands Black Hills firmly within Dividend King status.
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What also sets Black Hills apart from NextEra Energy is Black Hills’ 4.7% dividend yield. That is well above the yield from NextEra Energy and above the about 3.6% yield of the average utility, using Vanguard Utilities ETF as a proxy. And Black Hills’ dividend yield happens to be near a 10-year-high, so it looks like the stock is on sale.
Black Hills is a mix of an electric utility and a natural gas utility. It serves regions of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. Although inflation and rising interest rates have been a headwind, as they increase operating costs, Black Hills has been working to reduce leverage and, from a business standpoint, customer growth has been running nearly three times as fast as population growth in the United States. Although this utility is probably not one that most investors will have heard of, it appears well positioned to grow its business over the long term.
Northwest Natural is a mouse that expects to roar really soon
If you want to talk about a small but mighty utility, you need to look at Northwest Natural.
This electric and water utility based out of Oregon has an itty-bitty market cap of roughly $1.4 billion. Like Black Hills, Northwest Natural is a Dividend King. However, this little fellow’s streak of annual dividend increases is a huge 67 years long and counting. Northwest Natural’s dividend yield is 5.3% right now, which happens to be near a 10-year high (and well above the other two yields discussed).
Here’s the problem: Northwest Natural is predicting that 2024 will be a bad year on the earnings front, with earnings dropping from $2.59 per share in 2023 to between $2.20 and $2.40 in 2024. The big reason for that is that the utility’s costs have gone up, but it won’t get rate relief until later in 2024.
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However, the company knows this and is still backing its longer-term growth forecast of 4% to 6% earnings growth off of 2022 results ($2.54 per share). So management thinks this dip is just a blip as it continues to execute on its long-term growth plan. Given the impressive dividend record, it seems reasonable to give Northwest Natural the benefit of the doubt.
A little something for every kind of income investor
There are a lot of utility options if you are examining this out-of-favor sector for investment ideas. Three stand out right now as values, based on their historically high yields.
Dividend growth investors will like NextEra Energy. Dividend King Black Hills has a proven record and operates in an attractive region. And for those willing to wait for good news, Dividend King Northwest Natural is working with regulators to take the utility’s rising costs into account later in 2024 — which management clearly believes will get its business back on the growth track. It is likely that at least one of these utilities will be a good fit for your portfolio in April.
